Fitch Affirms Eletrobras' IDRs at 'BB-'; Outlook Revised to Stable

November 29, 2016 02:45 PM Eastern Standard Time

SAO PAULO--(BUSINESS WIRE)--Fitch Ratings has affirmed the Foreign and Local Currency Long-Term
Issuer Default Ratings (IDRs) of Centrais Eletricas Brasileiras S.A.
(Eletrobras) and its wholly owned subsidiary, Furnas Centrais Eletricas
S.A. (Furnas) at 'BB-'. The Rating Outlook for both IDRs has been
revised to Stable from Negative. Fitch has also affirmed the companies'
Long-Term National Scale Ratings at 'AA-(bra)' with a Stable Outlook. A
complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The Outlook revision for the IDRs reflects the Federal Republic of
Brazil's ('BB', Outlook Negative) increasing support to the Eletrobras
group through capital injections of approximately BRL3 billion during
2016 and guarantees for loans reaching 30% of the debt. Fitch also
expects the group's new management to implement measures to gradually
improve its consolidated cash flow from operations.

Eletrobras' IDRs consider its strategic importance to the country
because of its prominent position within the Brazilian power sector due
to its significant market share in generation and transmission. The
sovereign holds 51% of company voting shares.

On a standalone basis, Eletrobras' IDRs would be lower, due to its still
weak consolidated operational cash generation, high capital expenditures
program, and deteriorated credit metrics for the current rating
category. The decision to accept the early renewal of all of its
generation and transmission power concessions expiring between 2015 and
2017 severely affected Eletrobras' consolidated credit profile.
Positively, the group has been successful in reducing operational costs,
while additional compensation for the renewed transmission concessions
at BRL28 billion will be added to its cash flow generation after July
2017. Eletrobras' financial profile benefits from a strong liquidity
position and an extended debt maturity profile.

Eletrobras is exposed to political interference risks given its status
as an entity controlled by the Brazilian government, despite of the
positive initiatives from the new management. Current and future
governments can use the company to help it achieve certain macroeconomic
and social objectives through price controls and/or subsidies.
Regulatory risk for the power sector is considered moderate in Brazil,
while the hydrological risk is inherent to the sector.

Furnas' ratings are linked with its parent company (Eletrobras). Furnas
is one of Eletrobras' largest subsidiaries, representing approximately
24% of the group's installed generation capacity and 31% of its
transmission coverage in kilometers. Eletrobras has a centralized cash
management policy and is the primary funding provider for Furnas.
Eletrobras sets the company's strategic targets, such as corporate
governance standards and investment plans.

INCREASING FEDERAL GOVERNMENT SUPPORT

Fitch believes Brazilian government's increasing support to Eletrobras
is positive and should help the company to achieve the operational turn
around needed to bring the group's credit metrics to more adequate
levels in the medium term. Government has appointed market professionals
and sector experts to Eletrobras' Board and Management teams followed by
the development of a new Strategic Plan for 2017-2021. National Treasury
has increased its participation as guarantor in loans (30% of total
debt) and injected around BRL 3 billion of cash at Eletrobras' holding
company to be converted into capital in the near future.

CASH GENERATION TO IMPROVE

Eletrobras' consolidated EBITDA generation should achieve an annual
average of BRL2.7 billion in the period of 2017-2019, according to Fitch
projections. Eletrobras' weak operational cash generation reflects the
highly negative impact of its decision to accept the early renewal of
all of its generation and transmission power concessions in 2013. As
Fitch expected, in the LTM ended on Sept. 30, 2016 EBITDA was positively
impacted by the booking of additional revenues referring to the
compensation values for the transmission assets existing before 2000 for
the concessions that were early renewed in 2013. EBITDA for the period
reached BRL17.6 billion in comparison with a negative BRL6 billion in
2015. If the impact of compensation revenues was not factored in, the
EBITDA would be negative.

LOWER CAPEX NEEDED

Eletrobras' consolidated free cash flow (FCF) generation is expected to
remain negative, even though capex and investment have been revised and
reduced as part of a new business strategy. Fitch views as positive that
the company's subsidiaries did not participate in the recent
transmission and generation bids promoted by the government. Eletrobras'
Strategic Plan for 2017-2021 considers BRL35.8 billion of capex and
capital injection in subsidiaries. Expansion plans pose a challenge and
will need to be funded through new debt and cash generation. Fitch
expects Eletrobras to resume paying dividends in 2017. The company's
consolidated cash flow from operations (CFFO) of BRL5.3 billion during
the LTM ended on Sept. 30, 2016 was sufficient to cover capex of BRL1.9
billion and dividends of BRL5 million, leading to a FCF of BRL3.5
billion.

MANAGEABLE DEBT MATURITY PROFILE

Eletrobras' consolidated risk profile benefits from an extended debt
maturity schedule. Total adjusted debt, excluding the Reserva Global de
Reversao (RGR), was BRL40 billion in September 2016 and includes 38% of
loans coming from federal banks, which may give some financial
flexibility. The federal government has supported the company through
guarantees to part of the debts, reducing Eletrobras' cost of funds and
benefitting its cash flow. Around 27% of the debt (excluding the RGR)
was in foreign currency which brings some currency risk to the group.

DIVESTMENT OF DISTRIBUTION COMPANIES POSITIVE

Fitch believes the planned divestment of the power distribution
companies contributes to the group's ability to improve cash generation.
CELG's privatization auction is scheduled to occur on Nov. 30, 2016 and
the remaining six companies should be privatized or returned to the
Federal Government by December 2017. Fitch expects Eletrobras to sell
its stake/control at CELG D for a minimum BRL900 million, which enhances
the liquidity. In addition, even if the privatization of the other six
other distribution companies should not bring any cash to Eletrobras, it
will avoid approximately BRL 2 billion per year of losses.

HIGH IMPORTANCE TO BRAZIL

Eletrobras has a strong position as the largest electricity generation
and transmission company in Brazil, with 32% of installed generation
capacity and 53% of transmission lines as of September 2016. Its size
and active presence in the most relevant energy projects under
construction in Brazil make it strategically important to the country's
economy and development.

KEY ASSUMPTIONS

--Receipt of BRL27.8 bi from compensation value for the transmission
concession renewal over eight years, starting in July 2017 (inflation
adjusted);

--Dividends: no payment in 2016; 25% of net profit in 2017 and 50% from
2018.

RATING SENSITIVITIES

Factors that could potentially lead to a negative rating action are:

--A downgrade of the sovereign;

--The perception of a weakening linkage of Brazilian government support;

--Deterioration on the company's liquidity position.

Factors that could potentially lead to a positive rating action are:

--Sustained recovery of the group's operational cash flow generation;

--The Brazilian government's continuous support in order to strengthen
the linkage between the group and the Federal Republic of Brazil.

LIQUIDITY

Eletrobras has historically maintained a strong liquidity position. As
of Sept. 30, 2016, the company's consolidated liquidity ratios, as
measured by cash and equivalents/short-term debt and cash and
equivalents plus CFFO/short-term debt, were adequate at 1.1x and 2.1x,
respectively. Eletrobras' liquidity of BRL6.5 billion at the end of
3Q16, compared with BRL5.8 billion of short-term debt, should be
reinforced the receipt of the compensation revenues for the renewal of
the transmission concessions after July 2017 and the sale of CELG D. The
negative EBITDA, when excluded the non-recurring compensation revenues,
does not allow calculation of leverage ratios.

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